Investment Outlook | June 2018
Still on course
Contents
INTRODUCTION 3 STILL ON COURSE
4
PORTFOLIO ALLOCATION: CROSSING BORDERS
6
TAILWINDS LESSEN, BUT DIRECTION IS SURE
8
EQUITIES: STILL MOVING IN THE RIGHT DIRECTION
10
POSITIONING FOR DEMOGRAPHIC CHANGE
12
BONDS: NAVIGATING HIGHER YIELDS
14
MORE FOCUS ON SUSTAINABILITY
16
REAL ESTATE: CLEAR SAILING AHEAD
17
PRIVATE EQUITY: STILL ATTRACTIVE
18
COMMODITIES: POSITIVE LONG-TERM VIEW
19
CURRENCIES: EURO UNDER PRESSURE
20
ASSET ALLOCATION PROFILES
21
CONTRIBUTORS 22
This is an international ABNÂ AMRO publication. Risk profiles and the availability of investmentproducts may differ by country. Your local advisor will be able to provide more information.
2
Investment Outlook | June 2018
Introduction
Within this Investment Outlook, we present the views of ABN AMRO Private Banking’s investment team on positioning within financial markets. Positioning in a time when the economy is still doing well, when the economy is still on course, but when politics are disrupting the calm. It is with great pleasure that I would like to introduce the Investment Outlook for the second half of 2018. I would like to start by thanking Didier Duret, who in the past was responsible for delivering this Outlook to you. The Investment Outlook has always been well received, and it will be difficult to follow in his footsteps after so many years.
Richard de Groot Global Head Investment Centre ABN AMRO Private Banking June 2018
At the end of 2017, it was our belief that the economy was going strong. The combination of high growth and low inflation creates a scenario in which financial markets perform well. We also stated to be alert regarding possible risks developing during the year. These have developed, given the possibility of a trade war, political risks in Italy and higher market volatility. For the remainder of 2018, our view has not changed much. Economic indicators are no longer at all-time highs, but they remain solid. Interest rates have gone up in the US, but we still see few signs of inflation. Overall, we believe that the economy is still on course. We therefore continue to recommend risky assets, such as stocks, for your investment portfolio. In this edition of the Outlook, you will further find an article about sustainability and the impact that the different environmental, social and governance considerations have on the future performance of companies. In addition, we explain why diversification via an international portfolio is so important, both from a return and a risk perspective. ABN AMRO Private Banking’s investment team, who are responsible for this Investment Outlook, provides more information on their recommendations in the pages that follow. Your Relationship Manager or local investment professionals stand ready to assist you to prepare for what is ahead in 2018.
Richard de Groot
3
Still on course The economy is still on course, despite the distractions of geopolitics and a return of market volatility. While market noise may have increased, investment fundamentals are in good shape. Headlines can be deceiving. We have all read stories that
Large market fluctuations may continue
begin with a bold title, while the story that follows is more
Financial markets do not like uncertainty. If there is
balanced and nuanced. An alarming headline can grab atten-
uncertainty, for example, about a potential trade war,
tion, but it can also distract from the true story. This is espe-
then markets will fluctuate more. We expect that stock
cially true if the news is written in tweets of max 280 char-
prices will go up and down much more than we have
acters by the US president.
seen over the last 12 months. This is likely to continue through the end of the year.
We believe that despite the headlines seen in the first half of the year, the underlying story remains positive. The economy is doing well and this will likely continue through 2018 at least. The recovery in economic growth, which has
…but market and company fundamentals are still strong
been slowly strengthening since the end of the financial crisis, has proven to be exceptionally long and, at times,
Economic growth is stabilising and still solid
surprisingly resilient. Despite soft spots and worries, we are
The world economy is expected to grow by 3.9% this
still on course to a ‘more normal’ market environment where
year and we expect growth of above 3.5% in 2019. For
central bank support will no longer be needed. We expect
the US, growth this year is expected to be slightly higher
that this transition will be carefully managed and clearly
(3%) than for Europe (2.8%). The economic outlook
signalled.
therefore remains solid and supportive for investing.
There are some potential challenges on the horizon…..
Central banks are still on course back to ‘normal’ rates Central banks have been clearly communicating their strategy and are expected to stay on course back to more normal monetary policies. In the US, this means
Geopolitical concerns need to be monitored
interest rates will gradually rise, but at a slow pace that
Political risks have increased. This was clearly seen when
will not damage economic growth. In Europe, we are
the Trump administration suddenly started imposing
further from this transition, owing to slower economic
tariffs, particularly for Chinese imports. This could have
growth and lower inflation. As such, we do not expect
the potential to lead to a full-out trade war that would hurt
interest rates to rise in the eurozone until 2019.
economic growth. But we do not expect this to occur, as it is to the benefit of both sides to find a solution. The same
Company earnings remain robust
applies to the turmoil in Italy, no euro crisis is expected.
Solid economic growth and favourable financial conditions are supporting company earnings growth. This
Future growth signals have gone from great to good
is positive for dividends - the portion of earnings that
In predicting future growth, we often look at macroeco-
companies distribute to investors – and also enables
nomic indicators that act as forward-looking signals. For
company managers to invest more in their businesses.
Europe, such indicators had weakened. But, they weak-
Such capital investments can lead to higher productivity
ened from what had been unsustainably high levels.
and pave the way for future growth.
Nonetheless, further declines could signal lower growth and such indicators need careful attention.
4
Investment Outlook | June 2018
n e u t r al
ei rw
n de
ei rw
n de
r wei
gh t
s r o ng u
er w
o ve
und
ng
s t r ong
s r o ng u
s t r ong
gh t st
t
ro
gh t
EQUITIES
of sectors, we prefer the energy, consumer discretionary
r wei
ment bonds. We are neutral regarding regions. In terms
gh
o ve
returns to be well above the returns on cash and govern-
st
ng
stock-market returns this year, but we do expect equity
BOND
n e u t r al ro
ig
ht
EQUITIES
n e u t r al ht
We do not believe investors should expect double-digit e
r wei
und
o ve
There are still opportunities to drive portfolio growth Stocks remain the engine of portfolio returns
g
ng
er w
i
st
ro
e
n e u t r al
t gh
BONDS
and industrials sectors.
Thematics can play an important role in your portfolio Investing in certain global themes or trends can be a good addition to your investment portfolio, because these trends likely will continue despite fluctuations in economic growth. Thematic investments therefore have the potential to perform well under different market circumstances and to add diversity to stock portfolios. Three demographic trends that are driving changes and which will present investment opportunities are related to the increasing number of people who are 80 years of age or older, the impact of a declining workforce and the lifestyle of millennials.
Rebuild exposure to bonds as yields rise and diversify As central banks are, in general, on a slow path to increasing interest rates, the moment to start investing more in bonds is coming closer. A rising yield environment is always challenging for bond markets. We suggest seizing this period as an opportunity to gradually rebuild exposure to government bonds and to re-establish the diversifying role of bonds in overall investor portfolios. We also suggest diversifying bond portfolios that have a strong exposure to corporate credits. As growth matures and the European Central Bank gradually exits from its investments in corporate credits, investors should consider diversifying by increasing international exposure and by investing in segments with different risk characteristics that still promise good returns. Richard de Groot Global Head Investment Centre
5
Portfolio allocation: crossing borders Many sophisticated private investors have a bias for investing in their home markets. While it is a natural tendency to prefer local markets, it can limit portfolio diversification and investment returns.
More performance for risk A global, diversified investment approach can take advantage of internationally varied growth trends and their associated opportunities. At the same time, it can help to reduce risks. Diver-
For successful investing, it is essential to use all sources of
sification is based on the idea that a portfolio constructed with
return. This inevitably leads to the concept of broad diversi-
different types of investments will over the long run yield higher
fication, encompassing all regions of the world. Even asset
returns at any preferred level of risk than any individual invest-
managers without a wide international presence can imple-
ment found in the portfolio. This is because different markets
ment this, as we do at ABN AMRO, using our local European
do not typically move in lock-step, which can protect portfolio
expertise to successfully act in markets around the world.
returns when downturns occur in one market but not another.
Looking at three-year investment returns, it is easy to see
The relationship between risk and return and the advantages
why a global investment approach is crucial to investment
of diversification can be seen in the Figure. All efficient
performance. Over the past three years, for example (as of 28
portfolios are plotted on the line, noted as the “efficient
April), the Dow Jones Index gained 39%, the Nasdaq Index
frontier�.1 It shows the optimal returns for the given level of
51%, and the Euro Stoxx 50 11%. These returns expose that
risk, based on theoretical ideal portfolios. More return is not
US equities are close to record highs, while the Euro Stoxx 50
possible, at least not with standard market securities. As
is more than 30% below its peak. These simple comparisons
can be seen, the returns of the individual market indices are
make clear how a too narrow approach to stock investing can
all well below that of the optimal (efficient) portfolio.
significantly affect performance. And this applies not just to equities, but to all asset classes.
1 The efficient frontier is a theoretical concept designating a set of optimal portfolios that offer the highest expected return for a defined level of risk. Portfolios below the efficient frontier are suboptimal, because they do not provide enough return for the level of risk assumed.
Return
Investing in single markets is not optimal in terms of risk and return 12%
10%
8%
2% 0%
5
3
6
2 1
10
5%
10%
Source: Bloomberg, ABN AMRO Private Banking
6
9
4
6%
4%
Efficient frontier
7
15%
8
20% 25% Volatility
1. Bunds 2. European corporate bonds 3. 30/70 balanced (portfolio 30% stocks and 70% bonds) 4. 70/30 balanced (portfolio 70% stocks and 30% bonds) 5. World equities (MSCI All Country World Index) 6. European equities (MSCI EMU) 7. Emerging markets debt 8. Dutch equities (AEX dividends excluded) 9. German equities (DAX) 10. French equities (CAC 40 dividends excluded)
Monthly data from 1997-2017. Return and volatility are annualised,
Investment Outlook | June 2018
Home markets still dominate portfolios
companies comprise 4% and the share held by Dutch companies is less than 2%.
Despite the widespread belief and scientific proof regarding the benefits of diversification, not much has really changed
Focusing on home markets and the lost return it can gener-
in terms of investor behavior. For example, the home bias of
ate can be avoided. While it may be outside the “comfort
German private investors is, on average, around 60%-70%.
zone,� a well-diversified portfolio will likely be rewarded
Dutch investors are much more internationally diversified,
over time with an improved risk/return profile.
but also have a home bias. And the average French investor has an even larger home bias than German investors.
Reinhard Pfingsten
By contrast, Germany’s share of the MSCI World, the
Global Head Asset Allocation Services
established index of world equities, is only 3.6%, French
s d n a l r Nethe
Belgium
7
Tailwinds lessen, but direction is sure The US economy is forging ahead at a better-thanexpected rate. Europe has encountered a soft patch – but it is expected to be temporary.
temporary factors may also have played a role earlier in the year, such as adverse weather, a large number of worker strikes and the flu epidemic, for example. Weaker exports, in particular to Asia and Russia, are also a contributing factor.
Economic growth exceeded expectations last year, particu-
The strengthening of the euro over the last 15 months has
larly in Europe and Asia, while the US economy matched
also not helped, but it has not been so much that it should
what had been anticipated. So far this year, economic indi-
have a huge impact. Another issue is trade data, where
cators suggest that the eurozone economy is slowing, as
it appears that world trade growth has slowed so far in
are several economies in Asia. At the same time, the US
2018. This affects the eurozone more than the US, as the
appears to be holding up better. (See Figure.)
European economy is considerably more open to trade, while its dependence on China is also clearly greater.
Stimulus behind US growth
As far as temporary factors have had a role to play, they will obviously disappear. And if China is a culprit, we do
The combination of tax reform, tax cuts and spending
not expect that economy to slow significantly. Instead, the
increases will likely keep US economic growth high. It may
Chinese economy is expected to continue its very gradual
even accelerate, as the stimulus takes effect. Increasing
slowdown. Any deviation from that path will be addressed
stimulus when an economy is not far from full employment
by policymakers. On balance, we therefore do not think that
is an unusual experiment. Concerns that inflation may pick
the slowdown of the eurozone economy will be very severe.
up and that the growing US budget deficit may push interest
We expect economic growth to remain above its long-term
rates higher are easy to understand. We believe, however,
trend.
that the rise in inflation will be modest. This is because countering forces, related to technology, are likely to keep
The combination of strong corporate earnings, low interest
inflation in check.
rates, the availability of credit, the tight labour markets and the rapid progress of technology make it likely that compa-
Moreover, the increase in the funding required by the US
nies will step up investment spending. Judging by capital
government to pay for its stimulus measures is not likely to
goods orders placed with German and US producers, this is
cause big problems any time soon. This is due to the global
now being seen.
appetite for ‘safe assets,’ such as US government bonds. Next year may be a different story, however. The policy stimulus will be wearing off, and the gradual, continued tightening of monetary policy will start to bite. We therefore
Investment growth leads to productivity growth
expect lower US growth in 2019. Stronger investment growth will contribute, over time, to
Soft patch in Europe, but not severe
higher productivity growth, which will limit inflation. That is why we expect the key central banks to tighten only at a very slow pace. We expect that the US Federal Reserve will
While confidence indicators in Europe have weakened,
continue to raise rates by 25 basis points once every quarter
it is not clear why European growth would be softening.
this year. The European Central Bank (ECB) is expected to
Confidence indicators had been at exceptionally high levels,
continue its asset purchases, as promised, until September
and this may be why they have retreated. Perhaps some
and will then probably take quite a while to end them
8
completely. Rate hikes by the ECB are not on the agenda
One of the risks to continued global economic growth would
until well into 2019. The Bank of Japan is also expected to
be a full-blown trade war. We think, however, that what we
continue its accommodative policies until inflation moves
are actually witnessing are aggressive negotiating tactics.
close to their target rate.
No full-blown trade war is expected. And while the situation in Italian politics is a concern, we do not believe that another chapter of the euro crisis is unfolding. Han de Jong Chief Economist
There is a shift in circumstances between 2017 and 2018 in the US and Europe PMI Index
Manufacturing PMI 64 62
Europe US
Forecasts: Economic growth and inflation (%)
60
25 May 2018
58 56 54 52 50 May '15
Dec '15
Jul '16
Feb '17
Sep '17
Apr '18
Real GDP growth
Inflation
2018
2019
2018
2019
US
3.0
2.7
2.1
2.0
Eurozone
2.8
2.3
1.7
1.4
Japan
1.7
1.3
1.0
0.8
UK
1.4
1.7
2.3
1.9
China
6.5
6.0
2.5
2.5
World
3.9
3.7
3.4
3.2
As measured by indexed PMI manufacturing data in Germany and the US.
Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/
Source: Bloomberg
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
9
Equities: still moving in the right direction Volatility returned to equity markets in the first quarter, triggering investors to question if we are at the end of the bull market. Our answer, for the time being, is no.
Fundamentals remain supportive Despite the increase in market volatility, we believe that economic and company fundamentals will continue to support stock markets for the rest of 2018. World economic
Continuing economic growth, strong corporate earnings and
growth is set to continue, and will feed corporate earnings.
the modest tightening of monetary policies by central banks
Analysts, for example, expect earnings growth of around
should continue to support stock markets. But given that
8% in Europe and 20% in the US in 2018.
we are in new territory, after an extended period of very low US earnings are being boosted by the Trump administration’s
interest rates, we need to stay alert.
tax reforms and companies using extra cash for corporate Investors were jolted to attention in February. After several
buybacks. Analyst growth expectations were confirmed in
quarters of calm, and a strong start to the year, market vol-
the first quarter, when overall, US company earnings grew
atility made a huge comeback. Stock markets dropped by
by almost 24%. It is therefore likely that the ongoing bull
10%. The VIX Index, which measures market volatility (and
market will continue, given that earnings constitute a key
is also known as the Fear Index), jumped.
driver of market performance.
One explanation for the surge in market nervousness is that investors repriced risks regarding the economic and mone-
Share prices have become less expensive
tary outlook, factoring in the possibility of higher inflation and more interest rate hikes than had been expected by the
Since the market correction in February, traditional valua-
US Federal Reserve. Later, these fears receded.
tion metrics are also more realistic. Price earnings multiples, currently at 14 for European markets and 17 for US markets, are close to their long-term averages. Valuation metrics,
Market volatility spiked in 2018 and remains elevated
price per share to the company’s book value per share) also confirm the potential for a further increase in equity markets this year.
US market volatility European market volatility
40
such as the price-to-book ratio (i.e. the ratio of the market
Neutral stance on regions
30
Despite the positive outlook for stock investing in general, 20
both emerging and developed markets are suffering from intrinsic weaknesses. We are therefore neutral regarding regional investing. Despite relative undervaluation, emerg-
10
ing markets are very sensitive to the tightening monetary policy of the US Federal Reserve and to fluctuations in the US dollar. European markets appear attractive compared
0 Jan '16
Aug '16
Mar '17
Oct '17
May '18
to the US, but economic and earnings fundamentals are weaker in Europe. Finally, US markets have been in the
Source: Bloomberg
10
Investment Outlook | June 2018
lead for some time given the large size of the information
We remain neutral on the technology sector. It is suffer-
technology sector, but valuations in the sector have become
ing from high valuations, despite strong sales and earnings
expensive. We therefore advise wide diversification to avoid
growth. The sector’s volatility has also been elevated over
too large a concentration in any single market’s challenges.
the past three months. Areas of the market that we do not find attractive include the telecommunications and utilities
Invest in sectors exposed to economic growth
sectors as well as most of the consumer staples sector – companies in these areas tend to underperform when interest rates are rising.
We retain our preference for cyclical sectors, which typically
Olivier Raingeard
do well in an environment of economic growth. In particular,
Global Head Equity
we are positive regarding the consumer discretionary and industrials sectors, which can benefit from increasing capital expenditures and consumer spending as the economy improves. We are also positive on the energy sector, which we believe will be supported by an increase in oil prices. The energy sector can also be considered a defensive addition to portfolios, in case of any increase in geopolitical risks.
11
Positioning for demographic change For investors, three trends to watch are the growing segment of the population that is 80 years of age or older (80+), a declining workforce population and the group known as “millennials.�
By 2050, for every 100 people working in Germany, Spain, Italy and Japan there will be around 60 to 70 elderly people to care for. The same goes for some emerging countries, including Korea and China. This means that the next generation will need to work longer and more productively to pay for the social safety
The 80+ group spends differently
net. This also requires continuous education, as jobs constantly evolve. The smaller work force will also require further automation and the use of robots. This is one reason why China is
Most Baby Boomers, who are defined as being born between
setting robotisation high on its national priority list.
1946 and 1964, are retired now or are close to it. But this group will live longer than any previous generation. According to
Not every country is facing such a demographic headwind.
the United Nations, on a global scale, every five years the life
Countries such as the UK and France, for example, are avoiding
expectancy of new borns increases by one year.
a declining workforce, owing to higher birth rates and immigration. For the US, the millennial generation, which is typically
In the coming five years, people who are 80+ will become the
defined as comprising people who are now between 20 and 40
fastest growing population group. It is also one of the wealthi-
years of age, is an offset.
est groups ever seen. The world’s elderly are now enjoying their free time, but with aging, there are significant changes in terms of spending patterns.
The millennials are coming
While Japan is well known for having a large older population,
There are an estimated 2 billion millennials, responsible for 30%
this trend will also soon be seen in Germany, the US, Spain,
of global gross income. Especially in the US and China, this is
Italy, Korea, China and Russia. In the US, the 80+ population
a substantial group. Millennials, in general, are more highly
will grow towards 7% a year starting around 2021. (See Figure.) The effect of an aging population means an increase in spending on health care, senior housing and products that support
The elderly (80+) is becoming the fastest growing population group in the US
quality-of-life. At the same time, less will be spent on transpor-
%
tation and clothing.
8 7
A declining workforce will drive automation and robotisation Advanced economies are hitting a critical milestone this year.
6 5 4
For the first time since 1950, the working-age population will
3
decline. Japan and Germany, for example, are each projected to
2
see their labour supply decline by one-third by mid-century. For some big countries, this means fewer people to take physical and financial care of the elderly.
2018
1 0 2015
2022
2029
2036
Percent growth of the 80+ population in the US Source: United Nations
12
2043
2050
Investment Outlook | June 2018
educated than previous generations and technology is an integral part of their lives. A profound difference with the past is the work participation and education levels of women among millennials. Women have already bypassed men in the US in terms of education, as 36% have a college degree compared to 29% for men. Millennials are more focused on value for money, experiences, sustainability and technology than older generations. As they work more as freelancers and experience less job security, they can favour renting and sharing assets more than owning them. Increasingly popular among this group is watching professional video-game matches, known as e-sports. In 2017, more people watched the League of Legends finals than the US National Basketball Association finals and the Oscars combined. League of Legends is a multiplayer online battle arena video game.
Investment opportunities One obvious beneficiary of the named demographic changes would appear to be the pharmaceutical sector, but pricing pressure remains high; hospitals and home-care services are benefitting more. Also benefitting are senior-related products, such as for beauty care, hearing aids and dental implants. Travel and leisure will also continue to be in high demand. And in a few years, senior housing providers will see a strong influx of the 80+ population. Products and services focusing on a healthy lifestyle through sports and sustainably-produced food are also in strong demand, not only from the elderly, but even more so from younger people. Game companies are already benefiting from the rising interest in e-sports. Piet Schimmel Senior Equity Thematic Expert
13
Bonds: navigating higher yields While an environment of rising yields can be difficult for bond portfolios to navigate, it offers opportunities to rebuild government bond positions at more attractive rates. When taking profits in corporate bonds, we suggest using the proceeds to internationally diversify bond portfolios.
Holding corporate bonds has been generously rewarded over the past years, as stronger economic growth and lower interest rates supported corporate balance sheets. Purchases of corporate bonds by central banks lifted prices further, especially in Europe. Most bond portfolios now contain large positions in corporate bonds, built up in the search for yield. This was also an attractive segment given the support from
Bond yields have started moving upwards, which is a sharp
central banks. So much so, that it became viewed as a new
turnaround after decades of falling yields. Although US yields
“safe haven” for investors.
are on a different course than Europe’s, it was significant when US ten-year Treasury yields rose above 3% in April.
Now that growth is maturing, corporate bond spreads are approaching their low-point (See Figure.) These spreads are
The overall expected rise in yields is the trend, given synchro-
an indication of the risk premium on these bonds. When they
nised economic growth, rising inflation expectations and
are reaching their lows, they are at their peak of attractive-
tighter central bank policies. Yields, however, will not go up
ness. It marks the time to start reducing this position. Two
in a straight line, and there will be periodic setbacks. The
indicators of this new phase are tighter bank lending condi-
recent fall in core European yields on concerns over Italy is
tions and an increase in mergers and acquisitions activity.
an example of that. In general, it remains a challenging envi-
From the perspective of a bond investor, these are signs of
ronment for bond portfolios, particularly since yields are still
deteriorating corporate balance sheets. In addition, the ECB is
negative in many European segments and coupon income
lessening its support for the corporate bond market by reduc-
has been eroded over many years.
ing its bond purchases.
To stay afloat in this environment, bond investors need to be agile and alert. We suggest using each wave of higher yields to gradually increase bond holdings. This strategy will assist in restoring the traditional protection and diversification that
Corporate bond spreads are reaching a low point bp 900
US high yield
bonds can provide to portfolios, especially those that also contain stocks and their intrinsic risks. 600
Consider taking profits in corporate bonds Most investors severely trimmed positions in core European
300
government bonds in the aftermath of the financial crisis. We recommend adding government bonds back to your portfolio when they yield more than the inflation rate and after high yields have peaked. This may not be for some time yet, as the European Central Bank (ECB) is not in a hurry to raise interest rates. In the meantime, inflation-linked securities (which can protect against a surprise increase in inflation) are a good place to start.
14
0 Jan '10
European investment-grade corporates Oct '12
Jul '15
Apr '18
A comparison of US and European corporate bond spreads. Europe is represented by the Barclay’s Euro Investment-grade Corporate Bond Index. The Barclays US High-Yield Index represents the US. Source: Bloomberg
Tolerate the higher volatility in peripheral European bonds
market bonds in “local,” i.e. emerging-markets, currencies will also be suitable to further increase portfolio diversification.
Earlier this year, we suggested that investors increase their
Euro-based investors face foreign-exchange risk when invest-
position in Italian government bonds, as these bonds offered
ing in US bonds. We recommend hedging US dollar exposure
relatively attractive yields compared with European invest-
although, at around 2% a year, it can be costly. Nonetheless,
ment-grade corporate bonds. Despite the recent turmoil
US assets remain significant sources of portfolio diversification.
around Italy, we recommend investors hold on to these positions. We do not believe leaving the euro to be a viable option
Mary Pieterse-Bloem
for Italy. As long as Italian bonds are redeemed in euros, their
Global Head Fixed Income
attractive yields will be realised in the end. We believe that this will be the outcome over the next few years. Italy, however, has managed to put another serious dent in the reputation and sustainability of the Economic and Monetary Union of the EU, and this means that price volatility will likely remain.
Forecasts: Interest rates and bond yields 31 May
Year-end
Year-end
2018
2018
2019
Use the US and emerging markets for diversification
US Federal Reserve policy rate
1.75
2.50
3.00
With corporate spreads as low as they will probably get, we
3-month interbank rate
2.32
2.60
3.00
recommend gradually taking profits and diversifying into other
10-year Treasury
2.82
3.20
2.80
bond segments and internationally. The US bond market, where yields are closer to their peaks than in Europe, is one
Europe
example. We suggest investors consider buying US senior
ECB policy rate
-0.40
-0.40
-0.20
3-month interbank rate
-0.32
-0.33
-0.13
0.34
0.70
1.20
loans, and we expect that US mortgage-backed securities will also soon be of interest. We also advise buying emerging
10-year Bund
market bonds issued in the “hard” currencies of developed
Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/
markets. The time may also come when adding emerging
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
15
More focus on sustainability In just 12 years, the world will need 50% more energy, 40% more drinking water and 35% more food. These are the predictions for 2030, if current trends persist. It is a strong argument in favour of sustainable living and, relatedly, sustainable investing. It may even prompt the question, if not now, when?
environmental, social and governance responsibility. For our
Growing interest in sustainable investing
Incremental steps toward sustainability goals
sustainable investment mandates ABN AMRO invests with a focus on creating positive change in areas such as clean water, green energy, healthy living and lower carbon-dioxide emissions – to name just a few of the sustainability goals that we target.
A large number of investors are already investing in sustainable companies, and, based on a recent research study
It can sometimes be surprising how clever companies can
commissioned by ABN AMRO in the Netherlands, more are
be. For example, there is a specialist company in industrial
on the way. Our survey found that almost 40% of respond-
cleaning, such as for textiles, that after streamlining its
ents were planning to expand their sustainable portfolios
own energy use, took the next step to develop techniques
this year. What was interesting is that more investors (35%)
for customers to save energy by reducing water use and
said that they are primarily drawn to sustainable investing
lowering temperatures during washing. It eventually led
because of the performance return, with fewer (23%) taking
to reduced energy and water use – as well as costs --for
this investment approach primarily to “do something good
around 100 commercial laundries in Europe. It may not grab
in the world.” The positive attitude toward the performance
headlines, but it is an incremental step in the right direction
of sustainable portfolios is also supported by survey results.
to cope with the need for 50% more energy and 40% more
More than half of the investors with existing sustainable
drinking water by 2030.
portfolios reported that the performance of these investments is either “good or very good.” With the increased requirements on energy, water and food, it is clear that
This is not yet the status quo
there will be a lot of additional investments in this area and the companies will be able to benefit from this, supporting
In the literature about “green” investing, there is a concept
future performance.
known as “predatory delay.” It was developed by a US futurist, Alex Steffen. He defines predatory delay as “the deliber-
People, planet and profits
ate slowing of change to prolong a profitable but unsustainable status quo, whose costs will be paid by others.”
Sustainable investments are investments in the future.
We do not believe in this strategy. We believe that compa-
By investing in companies that maintain the right balance
nies that focus on doing good, in financial and sustainable
between people, the planet and profits you are investing
terms, will be the longer term winners. And we believe that
in companies with a positive perspective. These compa-
investors can benefit by investing in these companies.
nies are innovative and focus on new technologies. Our investment processes for ABN AMRO managed portfolios
Richard de Groot
support identifying sustainable companies using a system
Global Head Investment Centre
of sustainability rankings that enable us to target companies that are at the head of the class and not laggards in terms of
16
Investment Outlook | June 2018
Real estate: clear sailing ahead Real estate had a rocky start to 2018, when there was a broad-based correction across all risky assets. It has since recovered, based on stable cash flow, solid dividends and its relative attractiveness compared with other assets. Cash-flow growth at real estate companies declined in 2017, but it has now stabilised at 2-3%, given good economic conditions in the US as well as in Europe and Asia. The amount of debt used by real estate companies is also manageable. Even though we expect interest rates to rise, it should not have a dramatic effect on balance sheets. Most real-estate companies have refinanced their loans over the past years at very low rates and for long time periods. Finally, real estate valuations are reasonable; and dividends, at around 4%, are attractive. In comparison to the returns expected from cash or bonds, dividends from real estate companies provide a solid income stream for investors. For euro-based investors, currency effects can have a big impact on real-estate returns. This is because the majority of real-estate companies in the global benchmark are linked to the US dollar. A stronger euro (rising EUR/USD) directly translates into a decline of the benchmark, while a weaker euro has the opposite effect. In the near-term the US dollar could strengthen somewhat which should be positive for euro-based investors. For the remainder of 2018 we don’t expect strong directional moves in the US dollar so this should stabilise returns from real estate as well. As we look at the expected total return for real estate in 2018, we expect an attractive positive performance, although less than that of stocks. Real estate, however, has lower market risk compared to stocks. Given its income characteristics and attractive risk/return profile, we see value in holding real estate as part of a well-diversified portfolio that also includes stocks and bonds. Piet Schimmel Senior Equity Thematic Expert
17
Private Equity: still attractive Private equity investment remains attractive to investors, driven by continued strong distributions from private-equity funds, positive investor sentiment and the search for yield.
pushed acquisition multiples to a historically high level. This results in a concern that private equity managers may be overpaying for assets. Recent market data, however, shows that purchase prices declined somewhat for both US and European buyouts in the first quarter of the year to around
Because we expect that investors will continue to invest
10x earnings before interest, taxes, depreciation and amor-
significant amounts of capital in private equity, we do not
tization (EBITDA). This indicates that prices have reached a
expect that the bulk of committed but undrawn capital (“dry
plateau and managers are prudently deploying capital.
powder”), which has grown to an all-time high of USD 1.7 trillion, will materially decrease over the next 6-12 months.
Looking only at aggregate numbers can be misleading,
About USD 633 billion of this investment capital is commit-
however. Average purchase-price multiples are often driven
ted to buyout funds, with the balance going to strategies
by larger deals trading at high multiples. But the majority
such as infrastructure, real estate and private debt.
of buyout deals (measured by number of deals) takes place in the middle-market segment where prices are generally
The high level of capital to be invested has intensified
lower.
the competition for attractive target investments and has Of course, investors might wonder if now is the time to re-enter private equity investing. As perfect market timing is virtually impossible, we believe that investors should continue investing in private equity for the following reasons. XXPrivate
equity serves as a valuable diversification
instrument, as it captures investment opportunities that are not available through more liquid investments, such as stocks and bonds. XXCapital commitments to private equity funds are drawn on
over multiple years, giving investors exposure to different market conditions. XXHistorical
evidence indicates that a consistent and
disciplined investment in private-equity funds across different investment years (“vintages”) has been proven to be a critical success factor. Of course, investors should always be selective when choosing a manager and should concentrate on investing with top-tier private-equity firms with the extensive experience that enables them to make successful deals even when prices may be high. Oliver Schebela, Senior Investment Professional Private Equity, Andreas Hegedüsch, Senior Investment Professional Private Equity
18
Investment Outlook | June 2018
Commodities: positive long-term view The commodities market, as measured by the CRB Index, continued to rally during the first quarter of 2018, and reached its highest level in more than two years. Higher prices for oil, grains and soft commodities (mainly wheat and cocoa), as well as some base metals, such as nickel and aluminium, pushed the CRB index higher.
members, such as Saudi Arabia and Iraq. This will not lead to crude shortages in the near term. It does, however, add to the already critical situation for oil supply in the longer term. Future oil supply may prove to be insufficient to meet the rise in global demand, largely due to a lack of investment in oil upstream activities. Renewed trade tensions between the US and China,
Both base metal and oil prices have found support, mainly
weaker economic data and waves of risk aversion could
because of the possible disruption of future supply based
result in commodity price weakness in the months ahead.
on increased geopolitical tensions, including uncertainty
Nonetheless, we remain positive on the macroeconomic
about Iran and US sanctions on Russian oligarchs. Growing
outlook and believe that economic growth should support
demand and supply-related news, such as a drop in invento-
the CRB Index in the longer term.
ries and possibly less crops next year, caused prices to rise for cocoa and wheat.
Hans van Cleef Senior Energy Economist
Price trends in aluminium and nickel will remain volatile, as long as uncertainty over US trade tariffs and sanctions persist. In zinc, rising supply in the second half of 2018 will result in weakening prices. In terms of markets, supply tightness is expected in base metals, based on a seasonal pick-up in demand and possible disruptions to supply. This should spur a recovery in risk appetite among investors.
Oil demand continues to grow For oil prices, the focus for the remainder of the year will be on supply issues, as demand continues to grow at a solid
Forecasts: Commodities 23 May 2018
Spot price
Avg 2018
End 2018
pace. It is likely that the Organisation of Petroleum Exporting
Oil
Countries (Opec) will decide to keep its production cut
Brent USD/bbl
73
71
75
agreement in place. Any policy shift would need to be well
WTI USD/bbl
68
66
70
explained by Opec in order to prevent a shock in oil prices. Metals The US stepped out of the Iran nuclear deal and new
Gold USD/oz
1,310
1,287
1,250
sanctions against Iran will be imposed within six months.
Silver USD/oz
16.5
16.2
16
Although European parties (as well as China and Russia)
Platinum USD/oz
900
916
900
would like to continue with this agreement, Iranian exports
Palladium USD/oz
975
944
900
– mainly to Europe - will be hurt. Some of these exports can
Aluminium USD/t
2,325
2,210
2,200
be shifted to Asia. The majority of European crude imports
Copper USD/t
6,820
7,020
7,200
needs to be replaced by crude exports from other Opec
Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/ Source: ABN AMRO Group Economics
19
Currencies: euro under pressure A combination of negative eurozone developments and more positive sentiment towards the US has resulted in a drop in the euro/US dollar exchange rate (EUR/USD). It is likely that euro weakness will last longer than we had expected.
2019. We expect, for example, that the US fiscal deficit will increase. And as the Federal Reserve slowly sells its large bond holdings, foreigners will likely be needed to finance the deficit. A lower US dollar will probably facilitate this process, as US Treasury bonds will then be more attractive to foreigners. In addition, the fading strength of fiscal stimulus, such
There are a number of factors behind the weakening of the
as tax reforms, and a tighter monetary policy will slow down
EUR/USD. Taken all together, we think that for the coming
the US economy.
months, there is more weakening to come. Our new forecasts for the end of June, September and December are
We expect economic growth and US Treasury yields to peak
1.15 (previously 1.21), 1.10 (previously 1.21) and 1.15 (previ-
towards the end of 2018, and this will be negative for the
ously 1.20) respectively.
US dollar in 2019. It is also unlikely that the Fed will hike more than the market expects, which is two 25 basis-point
The reasons for the weakening of the EUR/USD include the
hikes in 2019. Taken all together, these drivers point to a
following:.
lower US dollar. Our year-end 2019 EUR/USD forecast is
XXThe
now 1.25 (previously 1.30).
stress in the Italian bond market is far from over. This
will weigh on the euro. XXNet-long
Georgette Boele
euro positions remain very large. With the EUR/
Senior FX Strategist
USD being below its 200-day moving average, a further deterioration in sentiment towards the euro will likely result in a scaling-back of these net-long positions. XXIn
the near term, there is much more uncertainty about
the outlook for growth in the eurozone than the outlook for the US. This will also leave its mark on the euro, until eurozone data would start to surprise very positively. We continue to expect a recovery of eurozone economic growth. Fundamentals are consistent with an above-trend expansion continuing. But, it may take longer for the data
Currencies forecasts FX pair
Spot 29 May
Q4 2018
Q4 2019
2018
to turn sufficiently to allay market concerns. continue to believe that investors are somewhat too
EUR/USD
1.1571
1.15
1.25
optimistic about ECB rate hikes in 2019. On balance, the
USD/JPY
108.75
110
100
market expects the ECB to hike rates in the summer of 2019,
EUR/JPY
125.84
127
125
while we expect the ECB to wait until September 2019.
GBP/USD
1.3241
1.34
1.42
This should also result in a lower EUR/USD, especially if the
EUR/GBP
0.8739
0.86
0.88
Federal Reserve continues its steady course of rate hikes.
USD/CHF
0.9930
1.06
1.00
EUR/CHF
1.1490
1.22
1.25
USD/CAD
1.2999
1.28
1.18
EUR/CAD
1.5041
1.47
1.48
USD/CNY
6.42
6.50
6.70
USD/BRL
3.74
3.70
3.20
XX We
Dollar to weaken in 2019 In the longer term, we continue to expect the US dollar to weaken, mainly because of weaker US fundamentals in
20
Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/ Source: ABN AMRO Group Economics
Investment Outlook | June 2018
Asset allocation profiles ABN AMRO’s Global Investment Committee model portfolio risk profiles in percent, starting with the most conservative (Profile 1) and ending with that most exposed to market risks (Profile 6). Asset allocation
Profile 1 Strategic Neutral Min.
Money markets
Profile 2 Current
Deviation
Max.
Strategic Neutral
Min.
Current
Deviation
Max.
5
0
60
32
27
5
0
70
16
11
90
40
100
63
-27
70
30
85
50
-20
Equities
0
0
10
0
0
15
0
30
19
4
Alternative investments
5
0
10
5
0
10
0
20
15
5
Bonds
Funds of hedge funds
5
5
0
5
5
0
Real estate
0
0
0
3
8
5
Commodities
0
0
0
2
2
0
Total Exposure
100
100
Asset allocation
100
100
Profile 3 Strategic Neutral Min.
Profile 4 Current
Deviation
Max.
Strategic Neutral
Min.
Current
Deviation
Max.
5
0
70
11
6
5
0
70
5
0
Bonds
55
20
70
39
-16
35
10
55
25
-10
Equities
30
10
50
35
5
50
20
70
55
5
Alternative investments
10
0
20
15
5
10
0
30
15
5
Money markets
Funds of hedge funds
5
5
0
5
5
0
Real estate
3
8
5
3
8
5
Commodities
2
2
0
2
2
0
Total Exposure
100
100
Asset allocation
100
100
Profile 5 Strategic Neutral Min.
Profile 6 Current
Deviation
Max.
Strategic Neutral
Min.
Current
Deviation
Max.
5
0
70
2
-3
5
0
60
3
-2
Bonds
15
0
40
11
-4
0
0
25
0
0
Equities
70
30
90
75
5
85
40
100
87
2
Alternative investments
10
0
30
12
2
10
0
30
10
0
Money markets
Funds of hedge funds
5
5
0
5
5
0
Real estate
3
5
2
3
3
0
Commodities
2
2
0
2
2
0
Total Exposure
100
100
100
100
The current asset allocation reflects active strategies that account for medium- and short-term views and represents a deviation from the longer-term strategic asset allocation.
21
Contributors ABN AMRO Global Investment Committee Richard de Groot
richard.de.groot@nl.abnamro.com
Global Head Investment Centre
Han de Jong
han.de.jong@nl.abnamro.com
Chief Economist
Reinhard Pfingsten
reinhard.pfingsten@de.abnamro.com
Global Head Asset Allocation Services
Olivier Raingeard
olivier.raingeard@fr.abnamro.com
Global Head Equity
Mary Pieterse-Bloem
mary.pieterse-bloem@nl.abnamro.com
Global Head Fixed Income
Georgette Boele
georgette.boele@nl.abnamro.com
Senior FX Strategist
Hans van Cleef
hans.van.cleef@nl.abnamro.com
Senior Energy Economist
Olivier Raingeard
olivier.raingeard@fr.abnamro.com
Global Head Equity
Paul van Doorn
paul.van.doorn@nl.abnamro.com
Senior Portfolio Manager, Equities
Bastian Ernst
bastian.ernst@nl.abnamro.com
Portfolio Manager, Equities
Maurits Heldring
maurits.heldring@nl.abnamro.com
Equity Research & Advisory Expert
Rainer Kloppert
rainer.kloppert@de.abnamro.com
Senior Portfolio Manager, Equities
Eric Lafrenière
eric.lafreniere@fr.abnamro.com
Senior Portfolio Manager, Equities
Esther van Munster
esther.van.munster@nl.abnamro.com
Senior Portfolio Manager, Equities
Jaap Rijnders
jaap.rijnders@nl.abnamro.com
Equity Research & Advisory Expert
Sandra Saidi
sandra.saidi@fr.abnamro.com
Senior Portfolio Manager, Equities
Piet Schimmel
piet.schimmel@nl.abnamro.com
Senior Equity Thematic Expert
Mary Pieterse-Bloem
Mary Pieterse-Bloem@nl.abnamro.com
Global Head Fixed Income
Roel Barnhoorn
roel.barnhoorn@nl.abnamro.com
Senior Fixed Income Thematic Expert
Florian Bardy
florian.bardy@fr.abnamro.com
Fixed Income Portfolio Manager
Willem Bouwman
willem.bouwman@nl.abnamro.com
Fixed Income Portfolio Manager
Chris Huys
chris.huys@nl.abnamro.com
Senior Fixed Income Portfolio Manager
Fidel Kasikci
fidel.kasikci@de.abnamro.com
Senior Fixed Income Portfolio Manager
Torben Kruhmann
torben.kruhmann@de.abnamro.com
Fixed Income Portfolio Manager
Jacques Verdier
jacques.verdier@fr.abnamro.com
Senior Fixed Income Portfolio Manager
Reinhard Pfingsten
reinhard.pfingsten@de.abnamro.com
Global Head Asset Allocation Services
Paul Groenewoud
paul.groenewoud@nl.abnamro.com
Quant Risk Specialist
Martien Schrama
martien.schrama@nl.abnamro.com
Product Manager
Chris Verzijl
chris.verzijl@nl.abnamro.com
Product Manager
Romeo Chamman
romeo.chamman@nl.abnamro.com
Product Manager
Arkadi Odintsov
arkadi.odintsov@nl.abnamro.com
Quant Risk Specialist
Thomas Domeratzki
thomas.domeratzki@ de.abnamro.com
Senior Strategist
Steffen Kunkel
steffen.kunkel@de.abnamro.com
Senior Strategist
Oliver Schebela
oliver.schebela@de.abnamro.com
Senior Investment Professional Private Equity
Andreas HegedĂźsch
andreas.hegeduesch@de.abnamro.com
Senior Investment Professional Private Equity
Group Economics
Global Investment Centre
Private Equity
22
Investment Outlook | June 2018
Disclaimers General: The information provided in this document has been drafted by ABN AMRO Bank N.V. and is intended as general
US Person US Securities Law Disclaimer: ABN AMRO Bank N.V.
information and is not oriented to your personal situation.
(‘ABN AMRO’) is not a registered broker-dealer under the U.S.
The information may therefore not expressly be regarded as
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a recommendation or as a proposal or offer to 1) buy or trade
and under applicable state laws in the United States. In addi-
investment products and/or 2) procure investment services nor
tion, ABN AMRO is not a registered investment adviser under
as an investment advice. Decisions made on the basis of the
the U.S. Investment Advisers Act of 1940, as amended (the
information in this document are your own responsibility and
‘Advisers Act’ and together with the 1934 Act, the ‘Acts’), and
at your own risk. The information on and conditions applicable
under applicable state laws in the United States. Accordingly,
to ABN AMRO-offered investment products and ABN AMRO
absent specific exemption under the Acts, any brokerage and
investment services can be found in the ABN AMRO Investment
investment advisory services provided by ABN AMRO, includ-
Conditions (Voorwaarden Beleggen ABN AMRO), which are
ing (without limitation) the investment products and investment
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Although ABN AMRO attempts to provide accurate, complete
taken into the United States or distributed in the United States
and up-to-date information, which has been obtained from
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23
Offices ABN AMRO MEESPIERSON AMSTERDAM Jan Willem Hofland jan.willem.hofland@nl.abnamro.com BANQUE NEUFLIZE OBC S.A. PARIS Wilfrid Galand wilfrid.galand@fr.abnamro.com BETHMANN BANK AG FRANKFURT Thomas Henk thomas.henk@bethmannbank.de ABN AMRO PRIVATE BANKING LUXEMBOURG Jean-Marie Schmit jean.marie.schmit@lu.abnamro.com ABN AMRO PRIVATE BANKING ANTWERPEN - BERCHEM Erik Joly erik.joly@be.abnamro.com ABN AMRO PRIVATE BANKING CHANNEL ISLANDS Patrick Millar patrick.millar@gg.abnamro.com
This publication is produced by the Global Investment Communications team. If you have questions or comments, contact the team at I-Comms.Global@nl.abnamro.com.
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